Soft US core inflation may keep Fed from speeding up hikes

An unexpected cooling in a key measure of US inflation means Federal Reserve policy makers may be hard-pressed to raise interest rates more aggressively in 2018.

The so-called core consumer price index, which excludes food and fuel, increased 0.1 per cent in November from the prior month and 1.7 per cent from a year earlier, less than the median projections of economists, a Labor Department report showed Wednesday. Including all items, CPI rose 0.4 per cent from October, accelerating thanks to a jump in energy prices.

Treasury yields fell after the report, which indicated that underlying inflation is still having trouble gaining momentum, though central bankers have said transitory factors are probably holding down prices. While inflation is below target, steady economic growth and unemployment at a 16-year low are among reasons why the Fed is widely projected to raise borrowing costs a third time in 2017 at the conclusion of its two-day meeting Wednesday.

The report “is a little on the soft side,” said Michael Gapen, chief US economist at Barclays Plc, who formerly worked at the Fed. “We still have the conundrum of solid employment, a declining unemployment rate but modest price and wage pressures.”